Endowments and foundations are eyeing hedge fund investments as one of the likeliest areas to benefit from the return of market volatility, according to a new survey by NEPC.
More than 80 percent of asset allocators polled by the Boston-based consulting firm said they expected the increase in volatility to be a longer-term trend, lasting a year or more. And hedge funds, the survey respondents determined, were the alternative investment best positioned to take advantage of rockier markets.
While the NEPC survey found that only about a quarter of non-profit investors had so far made adjustments to their portfolios as a result of this year’s turmoil, Cathy Konicki, a partner at the consulting firm, said endowments and foundations are “looking at what they can do going forward to take advantage of the potential volatility.”
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Hedge funds, she added, make sense in this type of environment, as their strategies can include shorting securities. Still, given that endowments and foundations have previously expressed concerns about hedge fund fees and performance, Konicki said their renewed interest was surprising.
When survey respondents were asked which alternative investments would generate the highest return over the next three to five years, for instance, hedge funds came in second place, garnering 15 percent of the vote. In first place, with 59 percent of the vote, was private equity.
According to Konicki, private equity remains extremely popular among endowments and foundations, despite concerns about crowding, dry powder, and valuations.
“Every investor is concerned about the amount of money that is going into private equity,” she said. “They’re still going to make commitments, but they’re going to be more cautious.”
Other concerns among investors included ongoing geopolitical tensions – chosen by 38 percent as the greatest threat to their investment program – and political uncertainty, cited by 19 percent.
For instance, 78 percent described themselves as having a “moderate” level of concern about a possible trade war between the U.S. and China, while 11 percent had “very high” concerns. Nearly three-quarters of respondents said they invested in China as part of a broad emerging markets strategy, while just under 9 percent had a China-focused private equity or private debt strategy.